Site Navigation

Site Mobile Navigation

A New Social Contract, but Which One?

Paul Krugman writes today about “starving the beast” — the idea, popularized under President Reagan, that depriving the government of tax revenue would force it to shrink.

As Professor Krugman suggests, the history of this strategy has been weak. The types of spending cuts necessary to substantially shrink the country’s long-term deficits are profoundly unpopular, especially given that Medicare, Medicaid and Social Security are among the federal government’s biggest spending commitments.

A decline in tax revenue — whether due to a legislated tax cut, or to a severe recession like the one we’ve just been through — simply does not seem to be an effective weapon in building the political will necessary to decrease spending today, tomorrow or 10 years from now.

In fact, in a paper last year, Christina D. Romer, the chairwoman of the President’s Council of Economic Advisers, and her husband, David H. Romer, found that legislated tax cuts not only did not shrink the size of government, but might even expand it: That is, if anything, tax cuts somehow seem to lead to spending increases.

The reason for this trend is unclear; the Romers propose that it may have something to do with a disconnect in the voters’ minds between spending and taxes, or perhaps that tax cuts promote sense of “shared irresponsibility” and encourage different political interests to clamor for their own piece of the pie.

Whatever the mechanism, attempts to starve the beast through revenue shortages somehow seem to make the beast all the more voracious.

Now may be an especially difficult time to argue for shrinking social safety net programs, even if adopted on a gradual, long-term basis. After all, the devastation and desperation wreaked by the financial crisis seems to have whetted the appetite for greater social insurance and a stronger social safety net.

In other words, while fiscal forecasts seems to call for a downsizing of the welfare state, the cultural zeitgeist seems to beckon for its growth. That tendentious renegotiation of the American social contract seems to be the fundamental economic tension of our times.

The Affordable Care Act imposes economic burdens that are the equivalent of taxes, an economist writes. Read more…

About

Economics doesn't have to be complicated. It is the study of our lives — our jobs, our homes, our families and the little decisions we face every day. Here at Economix, journalists and economists analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.